New State Restrictions on Non-Competition Agreements

By:  Katherine F. Weber

Washington has a new law that significantly restricts the enforceability of non-competition agreements in this state.  The practical effect of Engrossed Substitute House Bill 1450-- which was signed into law by Governor Inslee on May 8, 2019 and is scheduled to take effect as of January 1, 2020-- is that employers who utilize “non-competes” must re-evaluate this strategy, as to both their existing and future non-competition agreements.

Summary

The new law renders non-competition covenants (defined as “every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind”) void and unenforceable against:  (1) employees earning less than $100,000 per year; (2) independent contractors earning less than $250,000 per year; and (3) employees who are terminated as a result of a layoff, unless the employee is compensated at his/her base salary at the time of termination for the period of enforcement, minus compensation earned through subsequent employment during the period of enforcement. 

For purposes of the “minimum compensation thresholds” identified above, an employee’s “earnings” are defined as “the compensation reflected on box one of the employee’s United States internal revenue service form W-2 that is paid to an employee over the prior year, or portion thereof for which the employee was employed, annualized and calculated as of the earlier of the date enforcement of the noncompetition is sought or the date of separation from employment.”  An independent contractor’s “earnings” are those payments reported on an IRS 1099-MISC form. 

The law further provides that the “minimum earnings thresholds” established for both employees and independent contractors shall be adjusted for inflation.

In addition to the above-referenced minimum earnings thresholds, the new law also limits the permissible duration of non-competes; the law creates a rebuttable presumption that a non-compete covenant period of greater than 18 months is unreasonable and unenforceable.  While an employer/principal may rebut this presumption by providing “clear and convincing evidence” that a duration of longer than 18 months is necessary to protect the employer’s business or goodwill, this is a very difficult standard to meet and in most cases 18 months will be the maximum duration allowed for a non-compete.

Employers must also disclose, in writing, the terms of a non-compete no later than an employee’s acceptance of a job offer.  From a practical perspective, this means that an employer should provide a proposed non-compete as part of its initial, written job offer.  Additionally, if it is possible that an employee does not currently meet the minimum earnings threshold but may meet such threshold in the future, and if the employer wishes to enforce a non-compete covenant against the employee at that time, the employer must also specifically disclose this fact (and provide the proposed non-compete agreement) prior to the employee’s acceptance of the job.

Penalties for Improper Enforcement

Employers/principals face potentially significant liability if they attempt to enforce a non-compete covenant that is ultimately determined to violate the new law, or if the non-compete covenant sought to be enforced is rewritten, modified or only partially enforced.  The new law creates a cause of action for “a person aggrieved by a noncompetition covenant” that may be pursued by that person independently or by the Washington State Attorney General on behalf of an individual or class of employees.  If a court or an arbitrator determines that a non-compete covenant violates the new law, the violator must pay the aggrieved party $5,000 or actual damages, whichever is greater, plus attorneys’ fees and costs.  If a court or arbitrator rewrites, reforms, modifies or only partially enforces the non-compete covenant, the party seeking to enforce the covenant is liable for the aggrieved party’s damages, including attorney’s fees and costs.

Choice of Law and Retroactivity

An employer/principal may not avoid the restrictions of the new law by utilizing a forum selection or choice of law provision in its non-competition agreement.  The new law provides that, if the employee/independent contractor is “Washington-based,” any forum selection or choice of law provision that requires the employee/independent contractor to adjudicate outside the state of Washington, or that “deprives the employee or independent contractor of the protections or benefits of Washington law,” is unenforceable.

The date on which an employee or independent contractor executed a non-competition covenant also will not affect the covenant’s enforceability.  The new law expressly applies to all enforcement proceedings commenced on or after January 1, 2020, regardless of whether the non-compete covenant at issue was in effect prior to this date. 

Excluded Agreements

Importantly, non-solicitation and non-disclosure covenants are expressly excluded from the definition of “non-competition covenant,” meaning that employers/principals still may enforce these types of covenants and such covenants are not subject to the restrictions of the new law.  Also excluded are covenants entered into by a person who is purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest, as well as covenants entered into by a franchisee when the franchise sale otherwise complies with applicable Washington law.

Additional Prohibitions

Separate from the concept of “non-competition covenants,” the new law also prohibits employers from restricting, restraining or prohibiting employees who earn less than two times the state minimum hourly wage from having an additional job, supplementing their income by working for another employer, working as an independent contractor, or being self-employed, unless the employer can demonstrate that the outside employment raises safety issues or interferes with the reasonable and normal scheduling expectations of the employer. 

What this Means for Employers/Principals

In anticipation of the new law’s pending January 1, 2020 effective date, employers/principals may wish to revisit their current philosophies and practices with respect to the introduction of and/or enforcement of non-competition covenants. 

This may include revising future restrictive covenant agreements to eliminate the non-competition covenant altogether.  In many cases, a well-drafted non-solicitation, confidentiality and non-disclosure agreement may effectively protect and preserve an employer’s/principal’s business interests and operations against unfair competition.  If an employer wishes to retain a non-competition covenant, it should ensure that its future covenants comply with, and are introduced, applied and enforced in a manner consistent with, the new law.

As to existing non-competition agreements with current and former employees/independent contractors, the new law expressly prohibits a cause of action from being brought against an employer/principal for a non-competition covenant signed before January 1, 2020, so long as the non-competition covenant is not being enforced.  Employers/principals with existing non-compete covenants that do not comply with the new law must be mindful not to take any steps to enforce such covenants after December 31, 2019. 

Employers/principals with existing non-competition covenants who wish to amend such covenants to make them compliant with the new law should consider entering into new agreements with their current employees/independent contractors, in which case additional consideration to support such agreements (at least with respect to employees) is likely necessary.

In many cases, a non-competition covenant is only one part of a larger, more comprehensive restrictive covenant agreement.  As noted above, the plain language of the law suggests that, so long as the employer/principal does not seek to enforce the non-competition covenant included in such an agreement, there is no liability under the new law.  Accordingly, employers/principals with comprehensive restrictive covenant agreements may elect to rely on the other included restrictive covenants (such as the non-disclosure and non-solicitation covenants) and choose not to enforce the non-competition covenant.  In such case, arguably nothing further need be done.  However, to avoid any issues in this regard, employers/principals may also consider amending their existing agreements with current employees to specifically remove the non-competition covenant.  Arguably, because this does not impose any additional restrictions upon the employee, and in fact removes one of the restrictions, additional consideration would not be required.  However, this is not entirely clear at this time. 

Kathy Weber is a shareholder at Inslee, Best.  She can be reached directly at (425)450-4229 or kweber@insleebest.com.

This publication is intended to generally inform our clients of recent legal developments.  It is not intended, and should not be relied upon, as a substitute for specific legal advice.  Please contact legal counsel to further discuss any particular situation(s) or question(s) that you might have.